Should You “Sell in May” or “Plan to Stay”?

by Bryan Perry | May 5, 2012 10:00 am

The last few trading days have had investors in a full-blown tug-of-war as upbeat earnings from leading U.S. companies have been met head-on with one headline after another showing that the European economy is contracting further from already unsettling levels.

Wall Street’s darlings, both usual and newly dubbed, have been posting robust Q1 results that have turned heads in the most skeptical analysts’ corner offices along Water Street. While investor fears have focused squarely on Spanish debt and rising yields, the rest of the world is busy booking orders for U.S.-made goods and technology at a record pace.

Shares of the many leading S&P 500 companies have left a hugely positive impression on those that were ready to cash in the year after the exceptionally strong January-through-March period.

Many people likely are doubting this plan after getting such upbeat forward guidance from the likes of Microsoft (NASDAQ:MSFT[1]), Apple (NASDAQ:AAPL[2]), Nike (NYSE:NKE[3]), Coca-Cola (NYSE:KO[4]), Wells Fargo (NYSE:WFC[5]), Alcoa (NYSE:AA[6]), Boeing (NYSE:BA[7]), 3M (NYSE:MMM[8]) and a host of other big names too numerous to mention. Now it’s clear that the profit picture for owning U.S. equities is very much intact and that this rally is anything but over.

However, even with the S&P 500 at 1,400, the level of negative sentiment from professional managers continues to be elevated. There is a huge overriding fear of the year-end expiration on the Bush tax cuts, the mandatory spending cuts that would be triggered if Congress doesn’t come up with a continuing resolution, as well as the unwillingness of Congress to grapple with the little-discussed $16 trillion deficit that’s about to consume 100% of GDP to service.

We do live in interesting times, and the stock market is sending a message that fiscal accountability eventually will be embraced as the best way to get elected (or re-elected).

For now, the quantitative-easing party (both here and abroad) goes on, and stocks are loving it. But at some point, if monumental fiscal balancing of the debt isn’t addressed, it’ll feel like arriving at the big party after the keg is dry and all the girls have gone home.

I noted last week that once earnings season wound down, the economic calendar would be needed to deliver the necessary catalysts to propel the major averages higher. We’re about three-quarters of the way through the Q1 corporate reporting period, and the calendar already is providing some bullish nuggets on which for the market can trade higher.

The ISM Index for April came in at 54.8, above forecasts of 53.0. Initial jobless claims were 365,000 versus expectations of 375,000, and continuing claims were 3.28 million compared with estimates of 3.3 million.

Not on the U.S. calendar, but just as important was the China purchasing managers’ index (PMI) for April increasing to 53.3 from its March level of 53.1, marking the fifth straight month of PMI increases.